CapGen Financial, a New York-based private equity firm that invests in financial services businesses, has agreed to acquire approximately $100 million (€69 million) of newly issued shares of San Diego-based PacWest Bancorp.
The deal gives CapGen approximately 12 percent of PacWest as well as one board seat.
CapGen will acquire the bank’s common stock at $26 per share – a 15 percent premium to PacWest’s closing share price of $22.68 on Friday.
For CapGen, the PacWest transaction marks its second investment in a commercial bank. In April, it bought a 21 percent stake BankFIRST of Central Florida. Both transactions have had gotten their funding commitments form the private equity firm’s $500 million debut fund, which it raised last year after being founded by managing principal Eugene Ludwig. Ludwig previously served as US Comptroller of the Currency and Vice Chairman of Bankers Trust/Deutsche Bank.
John Sullivan, managing director at CapGen, said that the transaction will be carried out as an all-equity private placement of shares, representing one-fifth of CapGen’s fund. Although CapGen itself a bank holding company, it will create a separate investment vehicle which it will seek to register as a bank holding company for the purposes of the US Bank Holding Company Act (BHCA).
BHCA regulations make it difficult for investors to buy more than 9.9 percent of a bank’s stock without permission and increased regulatory supervision. And investments beyond 24.9 percent are not permitted without having to register as a bank holding company, which restricts further investments outside of the banking sector.
The PacWest transaction comes amid increasing interest in the role that private equity firms can play in shoring up the depleted capital base of US banks. Recent capital infusions by private equity firms TPG and Corsair into Washington Mutual and National City, respectively, have raised hopes that the US Federal Reserve will take steps to make BHCA regulations friendlier toward private equity investors, possibly as early this month.
Pending regulatory approval of its investment vehicle by federal and state banking authorities, PacWest will issue the shares to CapGen, which will then own. CapGen expects the transaction to close in the fourth quarter of 2008.
Sullivan said that CapGen was attracted to PacWest by the strength of its management team, with whom principals at CapGen have had a relationship for more than ten years.
“We look at the management team of PacWest as excellent stewards of capital who have done a wonderful job over the last ten years, the last two of which have been very trying econ circumstances in the state of California,” Sullivan said.
PacWest, formerly First Community Bancorp, is itself also a bank holding company. Its sole banking subsidiary is Pacific Western Bank, a provider of community banking in southern California with $4.3 billion in assets.
In June the company announced a second-quarter loss of nearly $475 million related to a write-down in goodwill. However, because goodwill is a non-cash asset, it is not included in calculating banks’ capital ratios. As a result, the bank’s tier 1 leverage capital ratio – which stood at a 9.77 percent at 30 June – was not impacted and, pro forma for the transaction, CapGen estimates that it will increase to 11.83 percent.
“The additional capital from this investment is expected to be used for general corporate purposes, to fund debt retirement and, most importantly, to take advantage of growth opportunities as they arise,” PacWest CEO Matt Wagner said in a statement.
Shares of PacWest ended Tuesday 8 percent higher, closing at $26.46.